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I first encountered the 10% savings method in The Richest Man in Babylon, a fine book by George S. Clason and one that I highly recommend for anyone interested in achieving financial security. The simplicity of the 10% method is what made it an immediate winner for me and the concept is simple:

Upon receiving your paycheck (be it each week, two weeks or end of each month), automatically put 10% of the amount aside as savings. Proceed with living on the remaining 90% of your paycheck.

Prior to adopting this strategy, my method of saving was somewhat arbitrary and less-than-satisfying. It involved paying all my expenses first and then saving whatever remained at the end of the month (which often was nothing). The 10% method forced me to “pay myself first” and then worry about all the household bills and monthly expenses.

The obvious question that follows then is: What if the remaining 90% isn’t enough to pay my monthly expenses? Excellent question, and one that I struggled with as well until I decided to give the 10% method a shot . What I learnt was a lesson in human psychology. You see, as soon as I took away 10% of my net income (as savings), my mind quickly went into “survival mode”. I asked myself: “How do I get by if I have less money than last month?” The answer, of course, was to reduce my spending so that it did not exceed what I had available to spend. Easier said than done of course, but it came through making small compromises and smarter spending choices (e.g. packing lunch instead of eating out with colleagues, cutting down on the morning Starbucks latte, reducing the cable channel package from 200+ channels to the 20 that I actually watched, etc.).  Needless to say it worked! A few conscious decisions about my spending habits quickly manifested themselves in real dollars that I was able to save each paycheck.

Once established, you can play with the percentage to see if you can absorb a 15% or 20% savings rate and still get through the month. Of course, the intention isn’t to starve yourself, so if it really does begin to hurt, cut back to the 10% figure. However, do not decrease your savings below the magical 10%. While the 10% figure is admittedly arbitrary, it helps forms a psychological barrier that you know shouldn’t be crossed - you have to draw the line somewhere.

So if you’re ready to try a new savings strategy that actually works, plan to set aside 10% of your next paycheck aside. Prepare beforehand by opening a savings account at your bank (where you can deposit the 10% of each paycheck) and review your major cost categories from last month to see where there is an opportunity to cut back (or spend intelligently). Remember, the goal is to cut back enough in spending to match the 10% of your paycheck that you will now be saving each month. Good luck!

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